Basic Economic Problems

Economics is the science of making choice under conditions of scarcity. What are the basic issues about which choices are to be made? Any society must make choices about three important problems. They are

1.What to produce and in what quantities ? Food or weapons; if so, in what quantities ?

Is it more food and less weapons or vice versa ?

2.How shall goods be produced?

Electricity from thermal power or from hydro power ?

3.For whom shall the goods be produced ?

A few rich and many poor or most people in modest comfort ?

These three basic problems are interdependent. The society must make proper choice about them in order to meet the development aspirations of people satisfactorily. The above three questions are common to all economies but every economic system attempts to make its own choice. The nature of a particular choice in a particular society depends on its specific economic system.

Economic Systems

An economic system is a way of answering these basic questions. Different economic systems answer the above questions differently. An economic system refers to how the different economic elements will solve the central problems of an economy: what, how and for whom to produce. It refers to the production and distribution of goods and services within which economic activity takes place. It refers to the way different economic elements, individual workers and managers, productive organization such as factories or firms and government agencies are linked together to form an organic whole.

Economic system consists of various individuals and their institutions like banking institutions, educational institutions and economic institutions. The most general economic systems are:

1.Traditional Economy

2.Capitalist Economy

3.Socialist Economy

4.Mixed Economy

I. Traditional Economy

In traditional economy, the basic problems are solved by traditions and custom rules every aspect of behaviour. It produces exactly to its consumption requirements. It is a subsistence economy. There is not much of sales as there is only small scale production. The same product will be produced by every generation. The production techniques are traditional.

II. Capitalist Economy

A capitalist economy is an economic system in which the production and distribution of commodities take place through the mechanism of free markets. Hence it is also called as market economy or free trade economy. Each individual be it a producer, consumer or resource owner has considerable economic freedom. An individual has the freedom to buy and sell any number of goods and services and to choose any occupation. Thus a market economy has no central coordinator guiding its operation. But self-organization emerges amidst the functioning of market forces namely supply, demand and price.

III. Socialist Economy

In a socialist economy, the means of production are owned and operated by the State. All decisions regarding production and distribution are taken by the central planning authority. Hence the socialist economy is also called as planned economy or command economy. The government plays an active role. Social welfare is given importance; hence equal opportunity is given to all. All such advantages have delivered high level of human development. Some of the most successful socialist economies are China, Cuba, Vietnam and North Korea.

IV. Mixed Economy

In a mixed economy, both public and private institutions exercise economic control. The public sector functions as a socialistic economy and the private sector as a free enterprise economy. All decisions regarding what, how and for whom to produce are taken by the State. The private sector produces and distributes goods and services. It manufactures consumer and capital goods in the interest of public welfare. A mixed economy possesses the freedom to hold private property, to earn profit, to consume, produce and distribute and to have any occupation. But if these freedoms affect public welfare adversely, they are regulated and controlled by the State. The main features of mixed economic system are:

Co-existence of Public and Private Sectors: In a mixed economy, both the public and the private sectors initiatives will be there. The most strategically and nationally important sectors of the economy will be reserved for the public sector. The rest will be left for private operation. While the public sector will have social welfare as the prime motive, the private sector will function with profit motive.